The Fed ... do[es] not want mortgage rates in particular to climb ahead of the economy. The memories of the taper tantrum - and the subsequent stumble in the housing market - still sting. This time around, however, higher rates are being driven not by a shift in the expected Federal Reserve reaction function, but instead by an improved economic outlook. If housing markets can handle the higher rates (note the return of the first-time buyer), and there is reason to believe they will if wage growth continues to accelerate, then the Fed will feel more confident that they are getting across a message consistent with the evolution of activity. And they will thus be more willing to begin the normalization process in 2015 as they currently anticipate.

Is the assertion that the "housing markets can handle the higher [mortgage] rates ... if wage growth continues to accelerate" correct?

Historically, in terms of the economic cycle, housing is a long leading indicator. Nominal wage growth, at least, is a long lagging indicator (lagging behind even the unemployment rate). Much as I respect Prof. Duy, the historical record contradicts the assertion that higher wage growth leads to better housing markets. If anything, it is the reverse that is true.

Note that, if anything, and increase in nominal wage growth typically has coincided with a *decline* in housing permits!

But what about real, inflation-adjusted wage growth? The record is more mixed:

While there is a superficial coincident relationship, a closer examination reveals that real wages rose all through the late 1960s into the early 1970s, despite several downturns in housing permits. The reverse - declining real wages with several housing booms - is true from 1974 into the mid 1990s. Finally, from 1998 to the present, permits and real wages have generally moved inversely!

While unfortunately there is no good way to compare real household income (which is only measured once every 3 years, officially) with permits, we can measure real aggregate wage growth (which I think is the best measure of an employment recovery). Here are permits (red) with real aggregate wages from 1965-85:

and here is 1986 to the present:

With the exception of the housing boom and bubble period of 1995-2005, where the data is more noisy, i.e., 1965-94 and 2006-present, where the data is noisy, the leading relationship of housing to real aggregate wages is clear.

So, with all respect to Prof. Duy, and to whomever may have similar opinions at the Fed, the record does not appear to support the notion that wage growth will maintain growth in housing even if the Fed is raising interest rates.

Thursday, July 9, 2015

Corporate profits, a long leading indicator, tend to turn before stock prices, a short leading indicator. Which means that corporate profits should lead stock prices. My midyear 2015 update of that relatioinship is up at XE.com.

Wednesday, July 8, 2015

Is it "the economy, stupid?" Or is the economy just one contributing factor to presidential election results? Either way, what economic metrics best correlate with the election outcome? Can we forecast those metrics reliabily enough to usefully forecast the election result itself even a year in advance?

With the advent of poll aggregators such as Nate Silver and Prof. Sam Wang of the Princeton Election Consortium, forecasts of election results have improved markedly, especially as we get down to the wire.

But can we usefully predict where those poll results might be? Well, that's an experiment I am going to undertake over the next year.

There are two components to this undertaking. The first is to identify those economic metrics which most correlate with election results. The second is to identify useful leading indicators for those metrics.

Fortunately, political scientists and statisticians have pored over economic data and proposed a number of metrics -- for example, real GDP or real income -- that they believe have had predictive value for election results. Typically these focus on the 2nd and/or 3rd quarter of the election year.

So my first goal is to examine those metrics, and select from among them perhaps three or four that appear to most closely match the outcome of the election.

Once I have identified those metrics, then I will try to forecast them, generally by variations on existing long and short leading indicators for the economy.

In the best case scenario, hopefully by the end of this year I will be able to forecast with confidence the likely value, or range of values, of several critical economic variables, which in turn will shape the results of the 2016 elections. Even if the exercize doesn't pan out, it should be useful and hopefully fun (in the nerdy sense).

In 2011, Nate Silver listed over 20 economic variables which best correlated with election results. In my next post, I will examine the most accurate of those variables in order to select a few to be tracked most closely.

Tuesday, July 7, 2015

At the end of last year, I highlighted 5 graphs to watch in 2015. Now that we have all of the reports through midyear, let's take another look.#5. Mortgage refinancingAfter a mini-surge at the end of January (light brown in the graph below), refinancing applications fell back to their post-recession lows due to a rise in mortgage rates. Mortgage News Daily has the graph:

Over the last 35 years, refinancing debt at lower rates has been an important middle/working class strategy. There is little room left for that strategy. As shown in the below graph I first published over 3 years ago, if mortgage refinancing stays turned off too long, and wages don't grow in real terms, then consumer spending falters and so does the economy:

That three year anniversary is now 5 months away. #4 Gas pricesHere is a graph of average hourly wages divided by gas prices (blue) since the bottom in gas prices in 1999:

How long must a worker labor in order to buy a gallon of gas? After skyrocketing in the lead-up to the Great Recession, gas prices collapsed, helping the consumer start to spend again on other things at the bottom of that recession. The steep drop in gas prices late last year took us almost all the way back to that bottom. Just as in 1986 and 2006, at first consumers saved the money, but once they loosen their pursestrings - which looks like it happened in May - this will be a strong tailwind to the economy.

#3 Part time employment for economic reasons

Next is a graph of part time workers for economic reasons expressed as a percentage of the labor force. In the first half, this continued to improve:

In the longer view, however, this is still 2% (about 3 million) above the boom level of 1999 and about 1.5% (2.25 million) above the level of 2007:

The definition of this measure changed in 1994, so the prior data is not directly comparable, but since the 1994 change subtracted about 1% from the measure, by adding 1% back in, we can get a good feel for how we compare with the recovery from the deep 1981-82 recession:

We are still at a level not seen since the mid-1980s.

#2 Not in Labor force but want a job now:This moved generally sideways during the first quarter, but improved nicely in the last two months:

It is now only 300,000 above its post-recession low of November 2013 (just prior to Congress's cutoff of extended unemployment benefits) and about 1.6 million above its 1999 and 2007 lows.

#1 Nominal wage growthAfter 3 poor readings last August, December, and February, YoY growth in nominal wages fell back close to their post-recession lows before rebounding this spring. Even so, YoY growth is still under 2%:

Compare our present expansion with the previous two. In the 1990s and 2000s, nominal wage growth was started to accelerate, and was approaching 3% YoY at roughly the same time as the broad U6 unemployment rate fell to the 9.5%-10% range. Currently U6 unemployment is 10.5%.There have been a few interesting notes about the lack of wage growth. The staff of the Federal Reserve has done a study indicating that the number of long-term unemployed plays an important role (since presumably these people are more desperate). In a similar vein, the Atlanta Fed has reported that the relatively high number of underemployed, and in particular employees who work part time for economic reasons, and also the high number of those out of the labor force, but who would return to work if conditions were better (see items number 2 and 3 above), are an important factor in holding down wage growth. It has also been suggested that the disproportionate (compared to normal times) percentage of relatively highly paid employees (Boomers) retiring from the labor force, and being replaced by younger workers, is holding down wages. In summary, six months into the year there has been no real improvement in either refinancing or wages. Should wage growth not improve, and mortgage refinancing remain dormant, we are likely to run into trouble - at least deceleratiing growth - probably by early next year.

On the other hand, involuntary part time employment has improved by about 300,000, and discouraged workers who have completely stopped looking have decreased by about 400,000. Shoould those trends continue, I expect wage growth to start to accelerate in about 4 to 8 months. Still, if current trends continue, we won't achieve real, full employment like 1999 or even 2007 for another 1.5 to 3 years!

Finally, seasonally low gas prices continue to be a boon to consumers.

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